Key Economic Indicators Are Weirdly Inverted. It’s a Warning Sign.

As the United States enters the fourth month of a combined public health and economic crisis, data on the state of the economy and the personal finances of individuals have gone weirdly inverted—and may do so again.

The inversion came in the form of figures showing Americans’ collective income rising by double-digits, even as tens of millions of people lost jobs, incomes, and businesses. It’s a statistical oddity caused by Congress’ massive infusion of cash into the economy. It suggests that the economy may be even more precarious than previously believed, because when government help dries up, there will be less purchasing power supporting the broader economy.

Personal income rose 10.5% for March, according to the latest Bureau of Economic Analysis figures, while consumption fell by 13.6%, leading to a massive increase in the savings rate for households.

The dollars going into the pockets of households largely came from government benefits, including $1,200 stimulus checks for many individuals and expanded unemployment insurance that gave an extra $600 a week to many recipients, among other changes. Households saved a third of their income in April as their spending on restaurants and travel dropped, along with spending on health care as people stayed away from doctor’s offices and hospitals.

This pattern confirms what other data and reports from corporate executives have shown: While there’s been some real material deprivation thanks to sky-high unemployment and pay cuts for some workers, incomes and spending have been more resilient than the headline unemployment numbers have indicated.

But because the resilience in consumption has been overwhelmingly due to direct government support, the only thing holding the economy back from the abyss are government payments that some policymakers are reluctant to renew. Without new legislation, the expanded benefits are scheduled to run out by the end of July. Last week, Senate Majority Leader Mitch McConnell said any new stimulus should be under $1 trillion, several times less than what some economists say is necessary to avoid ongoing economic calamity.

The importance of direct government spending is right there in the personal incomes figures. Of the annualized $20.7 trillion of personal income earned in April, more than $3 trillion came from government payments or unemployment, compared to $70 billion in March. Wages, on the other hand, dropped about 8%. 

The BEA data showed that while incomes went up, spending on durable goods fell 16% in April, indicating little confidence that incomes will hold up going forward as the economy remains depressed and government benefits holding up spending expire or peter out.

A probable scenario in the late summer and fall is that large numbers of jobs will be created and gross domestic product will soar as states and localities allow businesses to re-open. At the same time, many people may end up worse off: Either they will return to work to receive a lower wage than what they were getting from unemployment, or a large portion of prepandemic jobs simply won’t come back, leaving the economy at risk from an overall deficit in demand as opposed to “just” a viral attack.

The Congressional Budget Office projects that GDP will fall at a 38% annual rate in the second quarter, before rising 22% annualized in the third quarter, as the economy begins to snap back. The CBO projects the unemployment rate will to drop over 4 percentage points, from 15.8% to 11.5% from the third to fourth quarter of the year. Right as the presidential campaign hits its climax, there could be some of the “best economic data we’ve seen in the history of this country,” the former Obama administration Jason Furman told a group of officials, according to Politico.

But even the CBO’s projection still puts the unemployment rate at the end of 2021 at 9.3%, well above its pre-Covid level and indicative of deep economic damage.

These projections could be optimistic. There are signs that a wave of outright business failures is building. 

“If the unemployment benefits really roll off at the end of July, it is absolutely not a given that the third quarter looks like anything special,” says Claudia Sahm, director of macroeconomic policy at the Washington Center for Equitable Growth.

There is some inkling of a recovery in jobs listings for the sectors most affected by stay-at-home orders, according to data collected by the jobs site Indeed. The beauty and wellness sector is leading the way, says Indeed research director Nick Bunker But the good news for hair salons will quickly sour if their clients don’t return—and that requires the rest of the economy besides personal services to hold up. The data, however, indicates that economic rot is spreading. “Higher-paid, traditional, white-collar jobs are actually leading the trend in jobs postings continuing to decline,” Bunker says. That’s a sign of the economy going from bad to worse: The economic shock from the coronavirus is hitting jobs that aren’t directly affected by stay-at-home orders.

Typically during recessions, all sectors of the economy and labor market are hit, and if nonservice jobs are starting to disappear or not be created, it means that the economic shock from Covid-19 may have entered a new phase, Bunker said.

New unemployment claims are no longer setting records, a development the White House has pointed to as a sign of hope. But there are still millions of people signing up for unemployment every week. For that to continue well after shelter-in-place orders went into effect indicates that permanent damage to the economy could be setting in.

If you think about why a business might be laying someone off this late in the pandemic, it’s mostly pretty bad news,” Adam Ozimek, the chief economist at Upwork, told Barron’s. “It means either their business is struggling worse than they planned, and are unable to retain as much staff as they wanted so they are cutting back. Or it might mean that they are going out of business and firing the employees they had retained.”

Permanent job losses are worse for the economy and for workers than temporary ones, adds Ozimek. After a temporary layoff, an employee can return to the workforce with as little as an email saying come back to work when their employer’s prospects are strong enough to re-open. “Permanent layoffs, in contrast, means for that person to be re-employed two things need to happen: Some business needs to create a new job, and the unemployed person has to find a new job,” he said.

The Bureau of Labor Statistics’ jobs report for May, due on Friday, will give more granular detail on how many layoffs are permanent, Bunker said. But the mere fact that there’s still such a high level of claims, Ozimek said, is evidence that there are a substantial number of permanent layoffs.

Using data from the timesheet company Homebase, University of California professor Jesse Rothstein and colleagues have identified businesses that shut down and are now reopening in real time. “It’s giving us a sense that reopening has gone faster than I anticipated. I would not have guessed that such a large share of firms have reopened at this point.”

The most recent update from Rothstein and his colleagues using the Homebase data shows that about half the businesses that did shut down have reopened. “Reopened firms had collectively regained over half of their baseline hours and nearly 60 percent of their baseline employment levels. Almost 90 percent of this reemployment came through rehiring employees who worked at the firms before they shut down, as opposed to new hires,” he said.

“I still think there’s a big question of how many will reopen,” Rothstein said.

The risk for the economy today is that a combination of Republican preferences for less spending, eagerness to “get back to normal,” and simple inertia may inhibit the government providing what the economy needs most.“People need money,” says the Washington Center for Equitable Growth’s Sahm.

If Congress and the Fed can’t do more,” Sahm said. “Do you really think it’s going to snap back to normal?”

Matthew Zeitlin is an economics journalist in New York.